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| DATE: | February 7, 2011 (Date of publication) |
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| Click here to download the judgement (RKBK_Fiscal_control_interest_shares.pdf) |
Share sale price cannot be apportioned towards transfer of “controlling interest”
The assessee sold (off-market) shares of Gujarat Ambuja Cements Ltd to Holcim Mauritius for a consideration of Rs. 105 per share. The assessee claimed that the consideration for the share had (as per a valuation report) to be taken at Rs.74.20 and the balance of Rs.30.80 had to be treated as consideration “for parting with managerial control”. It was claimed that the said sum of Rs.30.80 was not assessable as there was no “cost of acquisition” of the “controlling interest”. The AO rejected the contention on the ground that managerial control is not a separate asset and assessed the entire capital gain as LTCG/STCG. On appeal, the CIT (A) purportedly followed Vodafone International vs. UOI 311 ITR 46 (Bom) and held that the consideration had to be apportioned towards the transfer of the share and transfer of controlling interest (as done by the assessee) and the amount attributable to the latter was not assessable to tax. On appeal by the department, HELD reversing the CIT (A):
(i) It is very unusual that the AO & CIT (A) did not notice that under Article 5 of the agreement, the assessee was to receive Rs. 15 per share towards non-compete undertaking which was included in the sale consideration. This amount is assessable as “business income” u/s 28(va);
(ii) The argument that “controlling interest” was transferred with the shares is not acceptable because the assessee is not a signatory to the share purchase agreement and the POA claimed was being given by the assessee to Mr. Narattom S. Sekhsaria, who signed the said agreement on its behalf, was not produced and it is not known whether the POA holder was authorized to transfer the “controlling interest”;
(iii) The share transfer agreement merely refers to the sale of shares and the non-compete covenant and fixes the consideration at Rs. 90 & Rs. 15 respectively but does not refer to any “transfer of controlling interest”. The other circumstances (AoA etc) support the view that there was no transfer of controlling interest;
(iv) As the agreement fixes the consideration for the share at Rs. 90, the valuation report splitting the consideration has no relevance. While Rs. 90 is assessable as LTCG/STCG, Rs. 15 is assessable as “business income”.
COMMENTS (Tentative)
As per my understanding, and in my opinion, the correctness or otherwise of the view taken by the tribunal , calls for a close and insightful review. For this purpose, a careful reading of the court’s order / observations in the Vodafone case is called for.
It is my conviction that, the court’s order does not speak of or lend any scope for any such apportionment of the ‘consideration’ for the transfer of ‘shares’.
In a recent article published in Business Line (ref. Issue of 29th Jan 2011), there is a similar discussion of ‘apportionment’. In that article, inspiration has been sought to be drawn from certain related provisions in the DTC Bill. However, for forming any independent opinion, one should separately examine and keep in sharp focus, also the true implications and relevance of the newly proposed provisions in the DTC Bill.
vswaminathan
Apropos my earlier comment:
I have since read the 52 page (downloaded) order. Frankly, my impression is that, – the case makes for a classic instance, though not a solitary one, in the history of case law: On the first blush, the Revenue may have reason to rejoice over its success at the second appeal stage; but not rightly so. For, its arguments before the tribunal seem to basically contradict and impair its own stance in the Vodafone case; so also several others pending court decision. In those cases, the stakes involved are known to be many times. Going by a critical appraisal, perhaps, there is no gainsaying that, the Revenue has accomplished, though unwittingly, what in common parlance is called,- ‘same side goal’.
On the other hand, the assessee in the tribunal case has, to suit its own purpose, chosen to take advantage of and adopt the same stance of the Revenue as in the Vodafone case.
Both sides are seen to have referred to and / or relied on the HC’s order in the Vodafone case, for supporting their respective but varying pleas on the crucial aspect of – ‘controlling interest’. In doing so, both seem to have overlooked or bypassed, among others, one very important aspect; that is this, – the subject matter of ‘transfer’ under litigation in that case is the shareholding of a foreign company, in, unlike in the tribunal case, another foreign company.
vswaminathan
To Add:
In the recently reported ‘Draft Rules’,in pursuance of the law as amended in 2016, it is noted that,as read and understood, the Revenue has,unwittingly or otherwise,chosen to and reiterated the factor of ‘controlling interest’, as one of the deciding criteria in an attempt for roping in ‘income’ deemed to arise from so called ‘indirect transfer’ within the domestic tax net.Comments have been shared separately, pinpointing why having regard to, and in the light of those comments, the Revenue will prudently require to have a re-look through, and if satisfied, substantially revamp the rules in certain material respects; so as to render those meaningful and easy to follow, to the end of successfully implementing and enforcing.
Now, it should be of relevance,hence interesting, to know about, -deserving an Update on,- the further developments and final outcome, if any, of the dispute in the ITAT (Kolkata) case reported over 5 years ago.
RIDER
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